The heat emanating from the homebuilding sector could certainly be helpful to investors in home improvement stocks as well.
Homebuilding stocks Lennar Corp. (LEN) and KB Home (KBH) are both rocketing upward on Wednesday after forecasting strong demand for homes to continue into the second half of the year. The run for both stocks builds on over 20% surges in both stocks to kick off 2019.
"Mortgage rates go up, people buy fewer homes. Mortgage rates go down, people buy more homes," Action Alerts PLUS portfolio manager Jim Cramer said, explaining the reaction succinctly.
The figures reported by the Mortgage Brokers Association on Wednesday bears this rather intuitive thesis out clearly.
Cramer noted an increase in housing also helps home improvement and material suppliers like Home Depot, Inc. (HD) and Lowe's Cos., Inc. (LOW) especially as the companies enter the peak spring sales season.
Both stocks are certainly reacting to the tie in on Wednesday, with both jumping upward after Wednesday's open amid the forecast of a spring home sales surge from both KB Home and Lennar.
"I said yesterday that you have to buy Home Depot because the spring selling season is good," Cramer commented. "That's what's happening."
Building on the correlation, each stock has enjoyed a double-digit run to start 2019 alongside the gains posted by homebuilders, shaking off concerns of the cyclical slowdown on both sectors.
"I like the home builders and I like Home Depot and I like Lowe's," Cramer concluded on Tuesday evening.
At least in the immediate term, the market seems to agree.
While investors are not historians and need to focus on what's ahead, as Cramer highlights, there is a troubling track record related to housing start figures as dismal as Tuesday's.
This trend is not our friend:
When Housing Starts' 12 month moving average fell 5 consecutive months, while Unemployment was under 5% (like now)...
2007, 2000, 1973, and 1969 bear markets started.March 27, 2019
The drop-off in housing starts, and how they are coinciding with a decline in mortgage rates in a way that is reminiscent of challenging times for housing-related stocks, should raise some caution for investors eager to pile in.
Nonetheless, the recent data is encouraging. The last time that mortgage applications reported by the Mortgage Brokers Association jumped by double digits, both Home Depot and Lowe's leaped by nearly 10% in the subsequent weeks.
So, while the rallies can never last forever, there is a great deal of evidence suggesting there are still gains to be had as the ice thaws and the grass gets greener.